What Happens When EIS Investors Want to Sell Before an Exit?

For investors in public companies, the answer is relatively straightforward. Shares can usually be bought and sold through an established market.

Private companies are different.

There may be no readily available buyer, no daily market price and no guarantee that an opportunity to sell will arise at all.

For EIS investors, that illiquidity has always been an important part of the risk.

But a new type of private share market could begin to provide another option.

This month, UK technology company Veremark is preparing to use PISCES, the Private Intermittent Securities and Capital Exchange System, to enable employees and early investors to sell some of their shares while the company remains private. Around 50 employees and early-stage investors are expected to be eligible for an October trading event involving approximately £6 million to £8 million of shares.

It raises an interesting question for early-stage investors.

Could selling shares in successful private companies eventually become easier without waiting for an IPO or acquisition?

Why Private Company Shares Are Different

When an investor backs an early-stage business through EIS, they are not buying a liquid asset.

There is no equivalent of logging into a brokerage account and selling the shares tomorrow.

Traditionally, investors may have to wait for an event that creates an opportunity to realise their investment.

That might be an acquisition, an IPO, a company share buyback or another investor agreeing to purchase their shares in a secondary transaction.

Sometimes those opportunities arrive.

Sometimes they don't.

A successful private company can continue growing for many years without being acquired or listing on a stock exchange.

That can leave early investors holding shares that may have increased substantially in value on paper but remain difficult to sell.

Enter PISCES

PISCES is designed to sit somewhere between traditional private ownership and the public markets.

Rather than becoming publicly listed, a private company can participate in intermittent trading events during which existing shares can be bought and sold.

The FCA describes PISCES as a new type of private stock market connecting buyers and sellers during occasional, time-limited trading events. Companies remain private and can control matters including when trading takes place, who is permitted to buy and potential floor or ceiling prices.

That distinction matters.

PISCES isn't intended to turn private companies into permanently traded public stocks.

It creates specific windows in which transactions can take place.

For an early shareholder, that could potentially provide an opportunity to realise some or all of an investment without waiting for the company itself to be sold.

Veremark Provides an Early Example

Veremark provides employee background-screening technology and was valued at around $100 million following a fundraising earlier this year.

Its planned PISCES event is expected to take place in October and could involve between £6 million and £8 million of shares.

Employees who meet the relevant criteria will be able to participate alongside early-stage investors, while institutional investors are expected on the buying side.

It's an interesting example of what private-market liquidity might look like in practice.

A growing company doesn't necessarily have to sell itself.

It doesn't have to undertake an IPO.

And early shareholders don't necessarily have to remain invested indefinitely.

Instead, new investors can potentially buy shares from existing shareholders during a controlled trading event.

What About EIS Tax Relief?

This is where investors need to be careful.

EIS contains specific rules governing when relief is available and when it can be withdrawn.

Most importantly, investors generally need to retain qualifying EIS shares for the relevant minimum holding period if they want to preserve the associated Income Tax relief.

Where the conditions for EIS disposal relief are satisfied, gains on qualifying EIS shares can also be exempt from Capital Gains Tax. HMRC confirms that this treatment applies to shares that attracted EIS Income Tax relief, subject to the relevant conditions.

So PISCES does not mean an EIS investor can simply sell shares whenever they choose without considering the tax consequences.

The timing of the original investment, the relevant EIS conditions and the circumstances of a disposal still matter.

Veremark's forthcoming event is particularly interesting because early angel investors are reportedly able to participate while retaining applicable benefits under HMRC-approved arrangements.

Individual investors should therefore consider their own circumstances and obtain appropriate tax advice before disposing of EIS shares.

Liquidity Without an IPO

The broader significance of PISCES goes beyond EIS.

Companies are remaining private for longer.

That can be attractive to founders who don't want the costs, disclosure requirements and pressures associated with becoming a publicly listed company too early.

But it creates a trade-off.

The longer companies remain private, the longer employees and early investors may have to wait for an opportunity to realise the value of their shares.

PISCES is an attempt to address that tension.

The FCA explicitly identifies providing shareholders with opportunities to sell while allowing companies to remain private as one of the purposes of the new market.

That could be useful for founders too.

Providing some liquidity to employees and early shareholders may reduce the pressure to pursue an IPO or company sale simply because existing stakeholders want an exit.

But It Doesn't Make Private Shares Liquid

There is an important distinction here.

PISCES creates opportunities for liquidity. It does not guarantee liquidity.

Trading events are intermittent rather than continuous. A company may determine when its shares are available for trading, and participation is subject to the framework and rules governing the particular event.

There also still needs to be someone willing to buy the shares.

Private-company investing therefore remains fundamentally different from owning shares in a large publicly traded business.

The FCA itself warns that investing through PISCES can involve additional risks compared with investing in public companies.

For EIS investors, that distinction is particularly important.

Tax relief can mitigate certain financial risks, but neither EIS nor a secondary market removes the underlying commercial risk of investing in an early-stage company.

A New Stage in the EIS Journey?

For more than 30 years, EIS has helped encourage private capital into younger British companies.

Most of the conversation naturally focuses on the beginning of that journey.

Which companies should investors back?

How does EIS relief work?

What makes an early-stage company investable?

But mature investment ecosystems also need to think about what happens at the other end.

If mechanisms such as PISCES develop successfully, investors may eventually have more ways to realise value from successful private companies without requiring those businesses to be acquired or publicly listed first.

The system is still new. The FCA is currently testing the PISCES framework through a regulatory sandbox scheduled to run until June 2030, after which its future regulatory treatment will be considered.

So it is far too early to suggest that the liquidity problem in private markets has been solved.

But the direction is interesting.

For early-stage investors, the question has always been which companies might succeed. Increasingly, there may be another question worth asking too: if they do succeed, how might investors eventually realise that value?